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CHOY v. FARRAGUT GARDENS 1

May 10, 1955

James CHOY, Herman Rappaport, Jennie Tumberg, Harry Jackman and Paul Jarvis, Plaintiffs,
v.
FARRAGUT GARDENS 1, Inc., Farragut Gardens 2, Inc., Farragut Gardens 3, Inc., Farragut Gardens 4, Inc., Farragut Gardens 5, Inc., and Federal Housing Administration, Alexander P. Hirsch, Henry Hirsch, Louis Benedex and Morris Kavy and Nostrand Realty Corporation, and Martin H. Benedex, Defendants



The opinion of the court was delivered by: WEINFELD

This is a class action brought by and on behalf of the tenants of five apartment houses constituting one project known as Vanderveer Estates. In short, their claim is that the project was excessively financed resulting in so-called 'windfall' profits to the owners and excessive rentals to the tenants.

The action is brought against the Federal Housing Administration (referred to hereafter as FHA) which issued a mortgage insurance commitment for the project under Title VI, § 608, of the National Housing Act; *fn1" five corporations, respectively Farragut Gardens 1, 2, 3, 4 and 5, Inc., which constructed and owned the project (referred to hereafter as either the mortgagor or owner); *fn2" Nostrand Realty Corporation, Inc., which owned the fee to the land upon which the projects were constructed and which was leased to the mortgagor; and individuals who are the stockholders and directors of the five owner corporations and the Nostrand Realty Corporation, Inc.

 Title VI of the National Housing Act was enacted for the purpose of alleviating the housing shortage which had existed prior to and had been aggravated by World War II. It was intended to provide rental housing promptly and in volume to meet that emergency. The legislation was complementary to other aids intended to meet the overall national housing needs.

 Under Title VI of the Act, Congress created the FHA as an agency to assist in achieving the legislative objectives and conferred on a Federal Housing Commissioner (originally called the Administrator) power to insure mortgage loans to be granted by lenders to builders. A mortgage was eligible for insurance where it did not exceed 90% of the amount which the Commissioner 'estimates will be the necessary current cost of the completed property or project, including the land'. *fn3" The Act also provided that the Commissioner 'may, in his discretion' restrict and regulate the mortgagor with respect to rents, rate of return, and other matters. *fn4"

 The complaint contains four counts. The first alleges that: the defendant Nostrand charged the owner corporations rental fees far in excess of the usual ground rentals for the purpose of increasing the cost of the project, thereby raising the estimated necessary current, cost; thereafter and prior to July 31, 1955 the owners, who were then about to construct the five apartment houses on the leased land applied to the FHA for a mortgage insurance commitment and submitted in support of the application architects' plans, schedules, estimates and other documents with the intent that the FHA would use the information therein to make a determination as to (1) the 'necessary current cost' of the completed project as required by the Act; (2) the maximum average rentals to be charged prospective tenants; and (3) the rate of return to be allowed the owners from rental income; that thereafter FHA or the Commissioner estimated the 'necessary current cost' of the project in excess of $ 21,719,300 and issued mortgage insurance for approximately that amount; the FHA under its regulations and based upon the determination of the 'necessary current cost' fixed the maximum rents to be charged prospective tenants and restricted the rate of return to the owners; that as a result of such determination and the issuance of mortgage insurance by the FHA the defendants received from the mortgagees approximately $ 21,719,300.

 The complaint further alleges that the FHA's estimate of the 'necessary current cost' and the restrictions based thereon (as to maximum rents and rate of return) were arbitrary, capricious and unreasonable and an abuse of authority in that the FHA (1) had failed to determine either accurately or properly the estimated necessary current costs; (2) had failed to conduct a proper investigation or inspection of the various plans, schedules or other forms submitted to it; and (3) had either grossly over-estimated the necessary current cost or knowingly determined its estimate far in excess of what it knew to be the actual necessary current costs; that by reason of such alleged arbitrary and unreasonable action the determination by the FHA of the necessary current cost exceeded by approximately 33% the actual and ultimate cost.

 It is further charged that the actual construction of the project was not in accordance with the plans as originally submitted, resulting in a substantial reduction of the construction cost; that the FHA arbitrarily or capriciously failed during the course of construction or upon completion of the project to require the owners to make progress reports or to account for the funds received from the mortgagee which, as a result of the changes made in the plans, were far in excess of the actual costs; that at all times the FHA knew the estimated 'necessary current cost' exceeded the actual cost and permitted the mortgagor to retain the excess received from the mortgagee without taking any action; that notwithstanding such knowledge the FHA arbitrarily, unreasonably and capriciously, upon completion of the project, failed (1) to re-adjust the maximum rents on the basis of the actual cost in place of the grossly inaccurate estimated cost; (2) to re-adjust the maximum rate of return to the owners; or (3) to compel the owners to use the difference between the actual cost and the estimated necessary cost for the benefit of the project.

 Further, that the plaintiffs in renting their apartments relied upon the regulation of the FHA fixing the maximum average rent as fair and reasonable rental based upon actual cost to the mortgagor.

 The second count repeats the allegations of the first, and in addition alleges that the regulations and administrative rules of the FHA were promulgated for the purpose of assisting the tenants and conferring a benefit upon them, and that the maximum average rental established by the FHA was higher than should have been permitted under the National Housing Act by an amount equal to the excess of the actual cost of the projects over the cost as estimated by the FHA.

 The third claim reiterates the allegations of the first and second counts and further charges that the various plans, schedules and other documents submitted by the owners and the individual defendants to the FHA for the purpose of enabling the latter to make a determination of the estimated necessary cost of the project and to establish the maximum average rental were false and fraudulent, and this, as well as the fraudulent withholding of information as to changes in construction, led the FHA to fix a maximum average rental higher than the defendant FHA would otherwise have permitted.

 The fourth claim realleges all that is set forth in the prior counts and further alleges the individual defendants as directors of the owner corporation voted themselves as dividends the difference between the estimated cost as determined by the FHA and the actual cost of the project.

 Relief Sought

 The plaintiffs assert that as tenants they have been injured and adversely effected in that they are compelled to pay rents in excess of what they would have had to pay if the FHA had not acted as charged. Accordingly they seek a decree of this Court that (1) the determinations of the FHA be reviewed and reversed and that it be ordered to re-determine ab initio the estimated 'necessary current cost' and the maximum average rents upon the basis of the actual cost of the projects; (2) in making such determination the amount of the ground rentals charged by the defendant Nostrand to the owner corporations be reduced; (3) the owner corporations be ordered to pay over to the FHA any rentals collected in excess of the maximum rents as re-determined and that the FHA then restore and distribute such excess amongst the various tenants in proportionate shares according to the respective rentals previously paid; (4) the individual defendants be required to pay back to the owner corporations the sums they had voted themselves as dividends; and (5) the owner corporations be directed to reduce the mortgages by a sum equal to the difference between the amount of the mortgages and the amount of the actual cost of construction.

 Finally, the plaintiffs also ask this Court to set 'aside, to the extent inconsistent with the judgment herein, any subsequent order of the defendant FHA permitting any further increase of the maximum ...


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